What You Need to Know About the May RBA Decision

Now here’s a central bank that walks the talk! To the surprise of a lot of market watchers, the Reserve Bank of Australia decided to cut interest rates from 2.00% to 1.75% in this week’s monetary policy statement.

If you’ve taken a look at my latest Forex Snapshot on the Australian economy, you probably would’ve seen this rate cut coming like Jon Snow’s return. But by the looks of it, the Land Down Under needed a whole lot more than Melisandre’s magic to revive the economy. Here are some of these factors highlighted in RBA Governor Glenn Stevens’ official statement:

Weak inflation

A good number of analysts have already started pricing in expectations for an RBA rate cut upon seeing the Q1 CPI report indicate a 0.2% drop in price levels, and head honcho Stevens admitted at the very beginning of his statement that lower than expected inflationary pressures were to blame for the rate cut.

Even though Stevens also pointed out that “commodity prices have firmed noticeably from recent lows,” he followed this up by saying that the pickup followed a long period of declines. As shown by the country’s widening trade deficit, “Australia’s terms of trade remain much lower than they had been in recent years.”

Global economic uncertainty

With Australia heavily dependent on its trade activity, the well-being of the global economy has a strong say on how demand for its commodity products might fare. The RBA acknowledged that global growth forecasts have been revised a little lower recently but also noted that sentiment in financial markets has improved.

When it comes Australia’s trade BFF China, policymakers confirmed that the PBOC’s efforts are starting to bear fruit, resulting to moderate growth in the world’s second largest economy. Still, RBA officials warned that “conditions have become more difficult for a number of emerging market economies” and “uncertainty about the global economic outlook” remains.

Domestic rebalancing

As indicated in their previous monetary policy statements, RBA policymakers assessed that Australia is still in the middle of rebalancing its domestic economy away from a mining-led investment boom to non-mining activity. They projected that this will carry on for the rest of the year, although growth is expected to continue at a moderate pace.

Central bank officials also noted that “labor market indicators have been mixed as of late,” possibly referring to the underlying weaknesses in the latest batch of employment reports. For the month of March, most of the gains were seen in part-time hiring while productivity and earnings fell.

 

Housing market risks

Another point worth noting in this month’s RBA statement is the focus on housing market risks. You see, central banks try to avoid lowering rates too often or by too much for fear of stoking a housing market bubble.

In their latest decision, policymakers noted that the potential risks from lower mortgage rates were lower than a year ago, giving them enough leeway to ease monetary policy. As I’ve noted in my Forex Snapshot, housing loans to owner-occupiers grew at a steady 0.5% pace while loans to investors slowed to 0.3%, which means that there’s less danger of overheating.

AUD appreciation

 

Ahh, what’s a central bank statement without some good ol’ jawboning? Just as he did in the last few statements, Governor Stevens reiterated that an appreciating exchange rate could complicate all the adjustments being made in the Australian economy, explaining that a low exchange rate has supported the trade sector. However, Stevens stopped short of threatening to intervene in the forex market to limit the Aussie’s gains, as the RBA rate cut would probably do all that work for them.